Matters To Consider When Understanding The Enterprise And Its Environment Accounting Essay


The purpose of this report is to provide an accurate assessment of Multiproducts plc. The job of an auditor is to provide an assurance to the public, for example the company's shareholders, that the company is operating following correct procedures. They would need a way to know how the company is performing and that the financial statements reflect a true and fair view of this performance.

Matters to consider when understanding the enterprise and its environment

A factor that needs to be considered in order to gain an understanding of the enterprise and its environment, is understanding the companies regulations. Knowledge on the industry of Multiproducts would need to be grasped. The industry in question is domestic and personal care products; information on the company's competition would need to be acknowledged. This is a good way of comparing how well the company is doing against their competitors and also if there is a decline in the industry for example, this is something that would be shown in the financial statements. Multiproducts are trading not only in the United Kingdom but in Eastern and Western Europe. Doing business initially in different countries arises many problems. A key problem is the language and culture barrier. The employees (120 based in Europe) are working in an environment which they may not have encountered before and will have to adapt to the people and their surroundings. With employees working outside the UK communication would become more difficult and the company would have to put a lot of trust upon their employees that the work is being carried out sufficiently. Another problem they may face is inflation rates and currency. This is something Multiproducts needs to take into consideration when doing business in a different country, their rules and regulations differ. Obtaining this information can be hard, so an insight of the procedures in Eastern and Western Europe would need to be looked at and reviewed if Multiproducts is accustom to their rules and regulations. If International Accounting Standards are being used across the board then this allows comparisons to be made.

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Another factor that needs to be considered is the nature of the entity. This means that as the auditor, knowledge would need to be given as to whether the company is using international accounting standards. This is most likely the case with Multiproducts. Information on the methods that Multiproducts are choosing to use need to be illustrated and defined. This allows calculations to be made to ensure the company is using and carrying out these methods correctly. The company would be able to provide their financial statements and the accounting policies they are using.

The objectives and strategies of Multiproducts can bring about a business risk. This risk may not be represented in the financial statements and may result in there being a material misstatement. Looking at the information provided by Multiproducts it shows that they have made a business risk in launching new products into the market. The reaction was said to be, "disappointing" which shows that somewhere along the process there may not have been researched fully or the change in the economy meant a change in the way customer spent and choose their product. Looking at how Multiproducts carried out their research and development would give an indication as to where the problem was.

The understanding of an entity can also be measured and reviewed. This can show the financial performance of how the entity is doing. Multiproducts promote working as a team and respect to be given to all. This can be obtained by employee performance indicators. If the employees feel appreciated and they work alongside one another, this can motivate them to work harder and strive to hit either/or exceed targets. As for customers and suppliers, by showing them respect Multiproducts can enhance their reputation and as a result future business. Evidence of this can be shown by how well the business is doing.

A further matter that needs to be considered in gaining an understanding of the company is internal control. The company needs to ensure that what goes on internally must be monitored. Multiproducts uses an IT-based programme SAP, they use this for the management side and this helps with their decision making and control. The users of this need to ensure that figures are inputted correctly and those decisions are made reflecting the statistics given. Retrieving this information the auditor would need access to their management and accounting information system.

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Materiality and how it aids significant accounting areas

Materiality is defined in the IAS 320,

"Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful."

BOWLER, Diane, 2010 Risk and Materiality. (Lecture, Accounting & Finance, Nottingham Trent University) [26th October 2010]

The concept of materiality is one that an auditor would always take into account. It is when the company produces accounts that have omitted (left out) important figures/records which would influence the decision of an individual using the financial statements. Also it deals with financial misstatements, where information has been calculated incorrectly (whether intentional or not) and has an effect of the company's overall value or profit. Although there are accounting standards that companies must follow some however manipulate their accounts to fit in with the financial position they require. Making a company's profit higher would indicate to the user of the financial statements that the company is doing well and that it is an enticing investment. On the other hand making a company's financial statements showing that they are making a loss can also sometimes be in a company's favour. It could mean that if they want to liquidate their assets for example they could do so quickly. This is why an auditor is crucial for the user as it ensures that they receive a true and fair view of the financial statements. Areas within the financial statements need to be checked and need specific audit attention for materiality.

Materiality within the financial statements

IAS16 states that assets must be depreciated, Alan Melville (2009). Looking at Multiproducts consolidated balance sheet there is no indication that they have depreciated their assets. An asset like Property, plant and equipment must be measured in the first stage at cost and then depreciated by the method the company deems most appropriate (straight line method or reducing balance method). The purpose of depreciating is to break down the assets value over its useful economic life. It is an estimate of the value of the asset to the business in that given time. Accounting standards require each year for deprecation to be recalculated and that the method used for depreciated is suitable to give a true and fair value of the asset. In regards to Multiproducts as they have not provided any sort of evidence that they have depreciated their assets it brings attention to the value they have given for the assets being correct. Also because of the economic climate Multiproducts closed down one of their factories, so this should be reflected in the financial statements. However there is no indication in the financial statements of the loss of the factory. This is material to the results of the company as it does not show the user of the accounts that the company may be struggling.

Another figure that would need to be checked for materiality is the taxation amount. The profit before tax in year 2009 is £44 million compared to year 2010 £45 million (as shown in appendices). The year of 2009 the company made less profit than the following year but induced a higher amount of taxation of £17 million. This does not seem to be correct as you would expect less profit to receive less taxation; however this is not the case with Multiproducts. This is significant as it might have been miscalculated which makes the financial statements inaccurate and unreliable.

The cost of sales figure for 2009 was £382 million and for 2010 £527 million (as shown in appendices). There is a significant increase and this links back to materiality as there may be a mistake in the financial statements. Multiproducts has put forward that oil and raw material prices had risen, but in the case of there being such a huge increase these figures would need to be recalculated just to ensure there is no misstatement.

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Inherent risks that may affect Multiproducts

An inherent risk is where there may be a material misstatement in the financial statements that does not take into account internal controls. Relating this to Multiproducts, the manufacturing costs for production had risen. The oil and raw materials prices had increased which could have been the result of Multiproducts having to close down one of their factories. The business does not have control over the price of the materials but this needs to be considered as if effects production and stock levels. This is a risk because with the increase in price means that the cost to produce the product has gone up. That would mean Multiproducts would have to make a decision whether their products sale price would increase. Increasing the sale price of a product can be better in terms of profit but it could mean that customers and potential customers would no longer be interested in buying Multiproducts merchandise.

Multiproducts is one of Europe's leading providers in their sector. This does not mean that they do not have competitors. Multiproducts would need to be cautious of how other companies are operating and how well they are doing in the same sector. They have altered the way they manage their factory efficiency and have reformulated their product, which has meant that it has reduced some of the impact received with the rise in the price of oil and raw materials. This inherent risk is not shown in the financial statements and also internally the company has no control over the rise in price. Multiproducts have used a strategy that with the increase on the raw materials they have changed factory activities so that the cost increase does not have such a huge impact.

The company uses Electronic Data Interchange (EDI) to show the stock levels and how much stock they require. This also relates to the price. If the stock level is forever changing the suppliers have to ensure that they have enough stock to supply Multiproducts with. Even though it is able to respond quickly to the change in circumstance, it does not however indicate the price remaining the same. Suppliers tend to give bigger discount when the materials are brought in bulk, if the amount of stock needed goes below this figure then the cost of raw materials could increase.

Multiproducts have tried launching a number of new products which did not receive a good response. They also have a number of other products that are still in the development stage that are said to not be likely to be sold within the next half year. Multiproducts have already tried launching new products and they were not received well by the consumer. They are taking a risk in developing further products that also may have the same response. Failure to recognise this risk and continuing may be very costly to the company.

The company's return on capital employed had dropped in 2010 to 19% from 26% in the previous year. This return on capital employed is an indicator on how the company uses their capital to make future revenue. The 7% decrease within a year could be a significant drop. It could mean that the company has made a loss on capital which for a business can be a big blow. A reason for this drop could be because they are having to react to the tough economic climate. Or on the other hand they may have invested their capital in reserves or assets. Information on this would need to be verified to explain why there was such a decrease and whether it is affecting the company financially.

Overview of Multiproducts

The financial statements of Multiproducts show they are making a profit. This is a good starter to check how well financially the company is doing. However when taking into account all factors, an example being closure of a factory or material price increasing, it shows that even though a company is showing a profit they are losses within. The financial statements can suffer omission of information or even misstatement so as an auditor these figures need to be assessed so that the user of the statements get given a true and fair view of how the company is performing.


Extracts from the financial statements for the year ended 31 March 2010

Consolidated Income Statement (in £ million)







Cost of sales



Gross profit



Selling and distribution costs



Administration costs



Operating profit



Financial income



Financial expenses



Profit before tax






Profit for the year



Consolidated Balance Sheet (in £ million)




Non-current assets



Intangible assets



Property, plant and equipment



Other non-current assets



Deferred tax






Current assets






Trade and other receivables



Cash and cash equivalents






Total assets






Current liabilities



Interest bearing loans and borrowings



Trade and other payables



Current tax payable









Non- current liabilities



Interest bearing loans and borrowings









Deferred tax






Total liabilities



Total net assets